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Cannabis Legalization Could Usher in a Whole New World of Regulation

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Torrey Holistics' license

Torrey Holistics' license

Kyle Dukes, 32, is an operations manager at Torrey Holistics, a cannabis retailer located in San Diego, California. The dispensary, which has been licensed to distribute medical marijuana since 2015, was the first to be licensed in California to sell recreational marijuana. This was a result of California's Proposition 64, which went into effect on Jan. 1, 2018.

I interviewed Dukes after visiting Torrey Holistics. Afterwards I had many questions.  

For a cannabis user from Indiana, where the stuff is illegal—and where the Association of Indiana Prosecuting Attorneys continues to evangelize against medical marijuana—the interior of Torrey might just resemble nirvana. But for Dukes and other retailers and suppliers in the cannabis industry, the legalization of recreational marijuana has been something of a mixed blessing.

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Torrey Holistics' Kyle Dukes

Dukes and his girlfriend Meghan Muckenfuss, are cofounders of Dr. Raw Organics, a brand of infused cannabis products. Based in Southern California, the two started the Raw Collective in 2013 to deliver their product to medical patients, and membership grew to over 7,000 members. Dr. Raw Organics produces pesticide-free cannabis oil infusions, supplying nearly 100 California dispensaries. Dr. Raw Organics was integrated with Torrey Holistics in Dec. 2017.

I spoke with Dukes by phone on April 6, 2018.

NUVO: Why is Torrey Holistics located in an area of warehouses and office parks?

DUKES: That’s easy. It’s been a real long battle. The city of San Diego started this application process for dispensaries in April of 2014. And they’ve got such strict land use regulations on dispensaries that when you pull out the land use map of San Diego and you look at it, according to their specifications, there’s really not much real estate estate available where you can put one that’s not near a church or a school or a children’s facility—all of these sensitive uses they call them. And so a couple of people were lucky enough to get them centrally located. But as it stands today, I believe there are only 12 locations and license holders operating. The fight for these permits and these locations: it was like Mayweather vs. McGregor. It was an absolute bloody fight and everybody was extremely competitive. Yeah it’s not the most ideal location, but when that’s all you’ve got to work with, it’s kind of a victory nonetheless.

NUVO: When you say 12 dispensaries is that in the state?

DUKES: In the city of San Diego.

NUVO: And that’s for recreational/medicinal.

DUKES: Exactly. To put things into comparison, last year, the state was operating under these loose regulations that we call Proposition 215 [the ballot measure which approved the use of medicinal marijuana]. And that’s been in effect since 1996 and there really was no regulation. It basically said that you can exchange medicine with members of your collective and it provided no oversight. And so under those regulations, as recently as December last year, there were about two to three hundred, whether it was a dispensary or delivery service operating, so that 200 to 300 retailers overnight on January 1, when the state enacted these new regulations—Proposition 64—that turned into 12. So a lot of people were devastated and left with nothing.  And so, it was really a tragic time for a lot of people in the industry because the competition and the fight to get one of these licenses was so difficult. Most people either quit, or if they are still continuing, they’re doing it without a license and they’re being heavily scrutinized by law enforcement so they’re dropping like flies.

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Torrey Holistics exterior

Torrey Holistics exterior

NUVO: So, basically, it’s a mixed bag when it comes to legalization because all these additional regulations came into effect. Is that what you’re saying?

DUKES: Yeah, exactly. There’s like 400 pages of regulation, whereas last year as recent as December, nobody had to abide by any of those rules.

NUVO: And I guess that gets to my next question: why can you only pay in cash?

DUKES: The federal government told banks that they could go ahead and accept money if they chose to, but most of the banks, they see it as too much risk and they don’t want to touch the cannabis money. So it makes it incredibly difficult to accept credit cards or any form of payment. I know, for example, I’ve been in this industry for six seven years now and I’ve seen people get bank accounts, they’ll put down Joe’s Landscaping or whatever, and they’ll start taking credit card transactions and it will last for three to six months. And then bank finds out what they’re doing and then they shut the account down. And then they’ll open the account at the next bank. And the next bank. And they’ll do that over and over again. Some people choose to do that, you know? Leapfrog method where they go from one bank to the next. But a lot of dispensaries choose to just take cash and not deal with that looming over their heads.

NUVO: Do you guys deal with banks?

DUKES: Just recently we have started a relationship with a credit union out of Colorado that is providing banking services at full disclosure dispensaries but we still don’t take credit cards because a lot of times the processors will charge you these astronomical rates so we don’t even mess with it.  There’s a couple of small private banks that are coming out and providing services but for years it’s been all cash. It’s kind of frustrating to have that kind of logistical nightmare.

NUVO: And I assume that having lots of cash on hand is one reason why you have armed  guards on the premises?

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Torrey extracts

Torrey extracts

DUKES:  Yeah, it’s a compliance thing. I think it’s the city that sets the compliance rules there but they require armed guards 24 hours a day. In addition to the rules and compliance, you also want to have security here because, like you say, you’ve got cash and tons of inventory on hand.

NUVO: One concern for a potential buyer who’s older and might not be used to buying CBD or medicinal marijuana. Is there a lab testing/regimen/system that you guys have your suppliers submit? Is there something already in the process that would guarantee safety and such?

DUKES: Yeah, all of that is kind of developing right now. The state has surprisingly never required it. There’s no regulation about it and in my opinion the brands and the product manufacturers should have taken the stand to provide that information regardless of whether it was required or not. But unfortunately a lot of them do not because in years past it’s been very very difficult to find products that would actually pass testing.  And it’s not actually done maliciously. A lot of times, product won’t pass the pesticide test because the pesticides are in the water, they’re in the soil, they’re in the air. And I’ve personally built a massive greenhouse, a 100,000 dollar project, that we built because we wanted to grow organically and do everything in house because we wanted to make sure that our product was clean. And even though we never used pesticides, we still had issues with testing because it’s in the air, it’s in the water, and it’s in the dirt, and even if you use all organic practices you can’t stop it from showing up on a test. And so no, there has not been a lot of transparency in the testing. But now the state is requiring it, not just yet; June 30 is going to be the D-Day for testing. So there’s going to be a lot of sad puppies on that day. I was watching an interview with Steep Hill Labs, they’re one of the more prominent testing labs here in California and they said they see over 50 percent of the samples that come through their labs do test positive for pesticides at levels that would not pass state testing. 50 percent or more.

It should have been something that people took a stand for a long time ago but the underlying tone of the industry was gosh we can’t bring this up right now because we’ve got a big problem. And I think everyone in the industry knows that and everyone’s been hush hush about it because like I said, even the organically grown products are still testing positive for pesticides even though they weren’t used in the growing practices. It’s insane.The only true way that I’ve seen to remedy this problem is by this new extraction technology where extractors are actually able to re-mediate and remove the pesticides from extracted oils through a distillation process. So I think that’s going to be extremely important moving forward here because you’re going to see farmers come to the table with hundreds and thousands of pounds of contaminated flour that’s basically worthless unless you extract it and distill it to clean the product.

NUVO: How is [testing] going to work?

DUKES: So the way the supply chain works is that the distributors are responsible for third party testing so once the product is grown by a cultivator then it can go to a manufacturer and then it can go to a distributor and then once a distributor gets a hold of it, then they have to test it, pay taxes on it to the state board, and then once it passes all that screening, they can then send it on to the retailer.  Most manufacturers are doing lab testing in house before it goes out to the distributor to guarantee what they’re sending out is not going to fail for any reason because it’s supposed to be incinerated or destroyed if it fails so you don’t want to send something out to a distributor or a third party lab unless you’re darned sure it’s clean, you know?

A lot of brands don’t [test] because it’s not required right now. And we saw that in May of last year. NBC News did an investigative report on and they went into 100 dispensaries in Southern California and pulled products off the shelf and all the big named brands you know, multiple products tested positive for pesticides that would not have passed state standards like in Colorado or what’s coming in California so this has all been coming to a head in the past nine months or so.

It all started because a gentleman in Los Angeles bought a vaporizer cartridge and he said, something’s weird, I feel dizzy and ill. So sure enough, he went to the lab, NBC got a hold of it. I don’t know who contacted who but sure enough the cartridge that he purchased had pesticides in it at astronomical levels and then they started taking all the brands off the shelves and then NBC did this whole thing.  You can find it easily if you just Google NBC, Pesticide, Southern California. And so they went and pulled 100 products off the shelf. It was not pretty.

NUVO: It seems funny that marijuana is still a Schedule 1 drug at the federal level and but it’s legal in the state but not necessarily to walk around and go into a bar and smoke marijuana. So what are some of the biggest issues as far as that disconnect?  

DUKES: Financially the biggest issue is the tax law.  Because marijuana is a schedule one narcotic like you say, there’s a law that exists that’s called 280E [which] was created in the 80s because a guy sold like one million dollars in cocaine and he was actually successful in challenging the IRS that claimed he owed 300,000 in income tax and he was successful in writing off his expenses for the sale of narcotics so at this point they put in this patch legislation called 280E that said, you cannot have administrative expenses for any schedule 1 scheduled narcotic.  And so that’s a major major issue for cannabis companies today is that because cannabis is a scheduled narcotic, you’re paying tax rates of 40, 50, 60 percent whereas if it was a lemonade stand you would pay 25, 30 percent.

NUVO: Are you paying to the IRS? Are you paying to the state?  How does that work?

DUKES: That 280E legislation is an IRS specific law. The state of California does allow you your full write offs as a normal business so yes people are paying their state taxes and people are also paying the IRS at an astronomical rate.  And so people think being in the cannabis industry it’s like winning the lottery or something but it’s actually the opposite. You work way harder for way less after all all is said and done.

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Torrey buds

Torrey buds

NUVO: Kyle, can you give a thumbnail sketch of your time in the industry?

DUKES: My girlfriend Megan, she’s my partner, we’ve been together eight or nine years and about 8 years ago we were in Rosarito, Mexico and we met a group of dispensary owners. At that time it was 2010 2011 and there were no licensed dispensaries. Everything was just the blue door at the end of the alley and you have to knock three times to get in and that’s the way it was, you know? So these guys said hey we’re looking for someone to make our edibles for our dispensary you know and it wasn’t like you called a distributor and told them to bring down a truckload of product. It had to be handcrafted and shuffled in the side door and make sure nobody saw it. That was the way if was done, so Megan is a talented baker and she started making our edibles and it kind of escalated to 200 edibles a month. So time went by and we kept doing it and the dispensary actually got shut down as most of them did at the time. So we started a delivery service to continue our edibles locally here in San Diego. And so our delivery service took off; we did really well and grew it very quickly; we wound up with over 7,000 members in our delivery service and so that’s how we arrived at Torrey Holistics. We actually integrated that delivery service; all of our customers, all of our staff was integrated into Torrey Holistics back in December so that we could continue to survive whereas like I said, most of those 200 to 300 retailers are unemployed right now because you had to partner with one of these 11 license holders or you were toast because it’s too expensive to try and compete with them. So we have a  great relationship here at Torrey and we oversee delivery here and we’re here six to seven days a week and doing everything from teaching classes and trainings to running the delivery service. You name it. And we also, about 2014-2015 I guess it was, we took our little edible brand and gave it a real brand and barcodes, nutritional labels and the whole thing. Our brand that Megan and I own is called Dr. Raw Organics. And so we grew that since 2015. We have about 100 retailers in the state that carry our products so we’re busy.

NUVO: I’m assuming that you think marijuana should be legal wherever you want it in the States. Why should it be legal in Indiana? 

DUKES: There’s no doubt, man. I grew up on the East Coast. I was raised to think that marijuana turned you into a loser and that you would never become anything and that it was for people who had no ambition and it was bad for you. The stories that I could tell you from these 7,000 people that I’ve met over the past five years.  It’s undeniable, man, completely undeniable that this is quite the opposite. Autism, epilepsy, PTSD, arthritis; just incredible success stories that would blow your mind. It’s not a drug that turns you into a loser. It’s pure medicine. And that’s the future of this is going to be highly distilled oils that are free of pesticides and are reformulated into various ratios that don’t get you so high but do produce incredible medical benefits and not just medical. People call it medical but I think that it’s just something that our bodies are built for.  We have receptors in our bodies especially for cannabis. It seems to me that it’s not medicine that we should take to cure ourselves but something that rather that our bodies are built to interact with.

NUVO: Is there a blurring of the lines between medicinal and recreational?  Am I reading that correctly?

DUKES: It’s been painted as medicine, yeah, because that’s what had to happen to propel this industry forward. But frankly the medical thing was really a joke.  Anybody and their brother could get a medical card. So yeah, you could call it a blurring of the lines I guess. Yeah, everybody’s using it for the same thing. They want to live healthier and they want to live happier.

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